Hedge Funds interview preparation

Questions

100

Traced to a firm

39

Firms

16

Updated

September 2026

Asked at

All firmsMan Group10Balyasny Asset Management7Bridgewater Associates3DED.E. Shaw3Apollo Global Management2KKR2Oaktree Capital Management2Point722SCSquarepoint Capital2ACAQR Capital Management1BGBaupost Group1Coatue Management1HPS Investment Partners1Northern Trust1Viking Global Investors1Wolverine Trading1

Topic

All topicsStrategy taxonomy8Stock pitch10Short selling6Portfolio construction8Risk and drawdown8Performance and alpha7Event-driven and merger arb8Distressed and credit5Fund structure and economics7Financing, NAV and operations6Compliance and research process5Quant and systematic6India and Category III AIFs5Career and fit11

Level

AnyCoreIntermediateHard

Type

AnyTechnicalMarket viewBrainteaserCaseFit

1. 001Walk me through the main hedge fund strategies and what each one is actually betting on.Strategy taxonomyCorephone / first roundMulti-manager platformsFund of funds

   Say this

   Group them by what the return actually comes from, not by asset class. Long-short equity bets on relative company fundamentals, global macro bets on the direction of rates, currencies and commodities, event-driven bets on a corporate action completing, relative value bets on two related prices converging, and stat arb bets on thousands of small statistical edges.

   Then walk it

   1. Long-short equity: long the good business, short the bad one in the same industry. The bet is stock selection, and the sector or market move is meant to cancel out.
   2. Global macro: top-down positions in rates, FX, sovereign credit and commodities, usually expressed in futures and swaps. Discretionary macro is a small number of large, thematic bets; the hit rate is low and the winners are big.
   3. Event-driven: the return depends on an event happening. Merger arb, spin-offs, index inclusions, activist situations, capital structure arbitrage. Timing risk is the main risk, not valuation risk.
   4. Relative value and fixed income arb: long one instrument, short a closely related one, earn the spread as it converges. Individually low risk, so it gets levered, which is where the danger sits.
   5. Distressed: buy the debt of a broken company and get paid through the restructuring, often ending up owning the equity. Long horizon, illiquid, legally intensive.
   6. Stat arb and quant equity: systematic, high breadth, thousands of positions, each with a tiny expected edge. Multi-strategy sits on top of all of these, allocating capital across pods and managing the correlation between them centrally.

   Where candidates lose it

   Listing strategies by instrument instead of by risk. Saying 'equity funds, bond funds, commodity funds' tells the interviewer nothing. The organising question is always what you are being paid for, and the honest way to close is to say most strategies are short some kind of tail: liquidity, correlation or deal completion.

   Expect next

   • Which of those would you want to work in, and why?
   • Which one is most exposed if funding markets freeze?
   • Where does the return in each case come from, in one word each?
2. 003What is a long-short equity fund actually doing, and where does the return come from?Strategy taxonomyCoretechnicalLong-short equityMulti-manager platforms

   Say this

   It buys the companies it thinks will do better than the market expects and shorts the ones it thinks will do worse, so the return is meant to come from being right about relative fundamentals rather than from the market going up. The shorts are there to fund the longs and to strip out the market move, not just to hedge.

   Then walk it

   1. Simple version: long 100, short 60. Gross is 160, net is 40. The 40 of net gives you some market exposure and the 160 of gross is where the stock selection lives.
   2. The spread is the product. If your longs are up 12 and your shorts are down 4 in a flat market, you made 16 points of gross spread on your book before financing.
   3. Shorts do three jobs: they generate alpha of their own, they neutralise the sector or factor you do not want to bet on, and the proceeds reduce the capital you need for the longs.
   4. Pairs are the purest expression. Long the share gainer, short the share loser in the same end market, and the industry cycle largely cancels.
   5. Where it breaks: in a violent rally the shorts hurt more than the longs help because losses on a short are unbounded and the position grows as it goes against you. That asymmetry is the whole reason short books get smaller when volatility spikes.
   6. And be honest about the fee maths. A 40 percent net exposure fund charging two and twenty needs meaningful spread just to beat a cheap 40/60 equity-cash blend, which is why gross spread and not net return is how these books are judged internally.

   Where candidates lose it

   Describing the short book as insurance. If shorts were only a hedge you would short the index and save the borrow cost and the research time. A long-short fund shorts single names because it thinks it can make money on them, and saying that is what shows you understand the business.

   Expect next

   • How do you choose between shorting a single name and shorting the index?
   • What happens to your book in a factor rotation?
   • What net exposure would you run and why?
3. 014What moves a stock?Stock pitchCorephone / first roundBalyasny Asset ManagementEquity Hedge · Chicago · 2021

   Say this

   Only two things: a change in expected cash flows, or a change in the rate those cash flows are discounted at. Everything else on a screen is one of those two arriving through some channel. Over a day, it is the surprise versus expectations rather than the level of the news.

   Then walk it

   1. Numerator effects: revisions to revenue, margin, capex and the duration of growth. The bulk of single-stock moves on results days are revision events, not valuation events.
   2. Denominator effects: risk-free rates, equity risk premium, the stock's own beta and perceived risk. These move whole sectors at once, which is why a long-only manager can be right on the company and wrong on the price.
   3. The crucial refinement for a hedge fund seat: prices move on the delta versus expectations, not on the absolute number. A company can grow earnings 20 percent and fall 10 percent because the buy side expected 25.
   4. Then the flow and positioning layer, which fundamental candidates skip and traders never do. Who owns it, how crowded it is, short interest, index inclusion, lock-up expiries, buybacks, and how the stock is set up into a catalyst.
   5. So on a results day the question is never 'were the numbers good'. It is 'were they better than the buy side whisper, and how was the stock positioned going in'. A beat into a crowded long can still sell off hard.
   6. One number to anchor it: for a long-duration equity, a 100 basis point move in the discount rate can be worth 15 to 20 percent of value with no change at all to the business. That is why rates dominate whole quarters of single-stock performance.

   Where candidates lose it

   Reciting a list of news categories. The answer is a framework with two boxes, and the sophistication is in adding expectations and positioning. Say the phrase 'relative to what was expected' or a hedge fund interviewer will assume you have only ever read sell-side notes.

   Expect next

   • How do you find out what the buy side actually expects?
   • A company beats and the stock falls 8 percent. What happened?
   • How do you think about the valuation drivers of a name?

   Reported by candidates at Balyasny Asset Management (Equity Hedge, Chicago, 2021). Source: Wall Street Oasis.

4. 021Walk me through the mechanics of borrowing a stock to short it.Short sellingCoretechnicalLong-short equityPrime brokerage

   Say this

   You locate the stock through your prime broker, borrow it against collateral, sell it in the market and hold the proceeds. You owe a borrow fee and any dividends the lender would have received, and you must return the same shares when you cover or when the lender recalls them.

   Then walk it

   1. Step one is the locate. The prime broker finds shares, usually from custody accounts of long-only holders, index funds or other clients, and confirms availability before you can legally sell short in most jurisdictions.
   2. Step two: the loan is collateralised, typically at 102 to 105 percent of market value, marked daily. The lender holds your cash or securities collateral, so they carry little risk.
   3. Step three: you sell the borrowed shares. The proceeds sit with the prime broker and earn a short rebate, which is a rate below the risk-free rate. The gap between the rebate and the market rate is the broker's cut plus the borrow fee.
   4. Step four: economic obligations while short. You pay the borrow fee, daily accrued, and you reimburse the lender for any dividend. Both are real costs against the thesis.
   5. Step five: the borrow is not term. It is recallable at will in most equity markets, so if the lender sells the underlying or wants the shares for a vote, you can be bought in at the worst possible moment.
   6. Also worth naming: the lender keeps the economic exposure and loses the vote, which is why voting-record dates cause borrow to tighten and why hard-to-borrow names can see fees spike from 50 basis points to double digits in a week.

   Where candidates lose it

   Describing a short as simply 'selling something you do not own' and stopping. Every practical constraint on a short book is in the mechanics: locate, recall, collateral, rebate and dividend obligation. Get the rebate direction right too. You do not earn the full risk-free rate on the proceeds.

   Expect next

   • What happens if the lender recalls the shares?
   • Who is lending the stock, and why?
   • What is naked shorting and why is it restricted?
5. 027Define gross and net exposure, and tell me what each one tells you.Portfolio constructionCorephone / first roundLong-short equityMulti-manager platforms

   Say this

   Gross is longs plus shorts, net is longs minus shorts, both as a percentage of capital. Net tells you your directional market bet; gross tells you how much stock selection risk you are running. They answer different questions and a good risk conversation uses both.

   Then walk it

   1. Worked example: long 130, short 70. Gross is 200 percent, net is 60 percent. That book has moderate market exposure and a lot of single-name risk.
   2. Net is the beta-ish bet. If the market falls 10 percent and the book is 60 percent net with beta one, you lose roughly 6 percent before any stock selection.
   3. Gross is the alpha bet, and also the accident exposure. Higher gross means more spread if you are right and more pain when factors rotate violently, because both legs can move against you at once.
   4. Beta-adjusted net is the number that actually matters, and saying so is the mark of someone who has looked at a risk report. A book that is 20 percent net with high-beta longs and low-beta shorts can be 40 percent net in beta terms.
   5. Typical ranges to have in your head: fundamental long-short runs 20 to 60 percent net at 150 to 250 gross; a market-neutral pod runs around zero net at 300 to 600 gross with tight factor constraints.
   6. The limitation: neither number captures concentration or factor tilts. A 300 gross book in thirty names with no factor constraint can lose more than a 600 gross book in four hundred names that is factor neutral. Gross without a factor report is a half-measure.

   Where candidates lose it

   Getting the arithmetic right and saying nothing about beta adjustment or what the numbers are for. Every candidate can compute gross and net. The differentiator is saying that beta-adjusted net is the real directional measure and that gross means nothing without a factor decomposition alongside it.

   Expect next

   • What net exposure would you run into a Fed meeting?
   • Can a zero net book lose 5 percent in a day? How?
   • How does gross relate to leverage?
6. 034What is a drawdown, and why do funds care more about it than volatility?Risk and drawdownCoretechnicalMulti-manager platforms

   Say this

   A drawdown is the peak-to-trough fall in NAV, measured from the highest point reached. Funds care about it more than volatility because it is what triggers redemptions, stop-outs and the high water mark problem, all of which are path dependent in a way volatility is not.

   Then walk it

   1. The arithmetic is asymmetric and that is the whole point. Down 50 percent requires plus 100 percent to recover. Down 20 percent requires plus 25. Compounding punishes the depth of the hole, not the wiggle.
   2. Volatility is path independent and drawdown is not. Two funds with identical monthly volatility can have very different worst drawdowns depending on whether the bad months clustered.
   3. The commercial reason is redemptions. Investors leave near the trough, so a deep drawdown permanently shrinks the capital base and the manager never gets to earn the recovery on the original amount.
   4. Then the fee mechanics: below the high water mark the manager earns no performance fee until the loss is recovered, so a deep drawdown can make a business unviable even if the strategy eventually works. That is why funds sometimes close after a bad year rather than grind back.
   5. On a platform it is even more direct. The drawdown limit is a contractual stop, so a path that touches minus 8 percent and recovers is worse than a path that grinds to minus 5 and stays, because the first one ends your seat.
   6. Useful additional measures to name: time to recovery, the Calmar ratio which is return over maximum drawdown, and the Sortino ratio which only penalises downside deviation. Maximum drawdown alone is a single historical observation and therefore a fragile statistic.

   Where candidates lose it

   Defining drawdown correctly and then giving a purely statistical reason for caring. The reasons are commercial and structural: redemptions, the high water mark and the platform stop. Also do not present maximum drawdown as a robust risk measure. It is one realised path, and the next one will be different.

   Expect next

   • How long does it take to recover a 25 percent drawdown at a 10 percent return?
   • What is the Calmar ratio?
   • Why would a fund shut down rather than trade back to its high water mark?
7. 042What is the Sharpe ratio, and what are its limitations?Performance and alphaCorephone / first roundAsset managementMulti-manager platforms

   Say this

   Excess return over the risk-free rate, divided by the volatility of that excess return. It is return per unit of risk, and the limitation is that it defines risk as volatility, which is the wrong definition for anything with a skewed or illiquid payoff.

   Then walk it

   1. Rough benchmarks to have in your head: a long-only equity index sits around 0.4 to 0.5 over the long run, a decent hedge fund 0.8 to 1.2, a platform at the fund level 2 or more because of diversification across pods, and anything claiming 4 over a long period needs explaining.
   2. Annualisation matters and gets fumbled. Multiply the monthly mean by 12 and the monthly standard deviation by the square root of 12. That scaling assumes independent returns, which is exactly what fails for illiquid books.
   3. Limitation one, symmetry. Volatility punishes upside surprise as much as downside. A fund whose good months are huge looks worse than a fund grinding out the same return, which is backwards for an investor.
   4. Limitation two, and this is the big one: a strategy that sells tail risk has a beautiful Sharpe until the tail arrives. Writing out-of-the-money options or running a levered convergence trade manufactures a high Sharpe by hiding the risk in the third and fourth moments.
   5. Limitation three, smoothing. Illiquid positions marked on stale prices have artificially low measured volatility, which inflates the ratio. The tell is high autocorrelation in monthly returns, and I would check that before believing any private-credit or distressed Sharpe.
   6. So I would look at Sharpe alongside skew, kurtosis, worst drawdown, time to recover and return autocorrelation. Sortino and Calmar cover part of the gap, and neither fixes the fundamental point that one number cannot describe a return distribution.

   Where candidates lose it

   Forgetting the risk-free rate in the numerator, or annualising by multiplying volatility by 12. Then, on limitations, giving only the symmetry point. The tail-selling and the stale-marks problems are what an allocator actually worries about, and naming autocorrelation as the diagnostic is the detail that lands.

   Expect next

   • How would you detect a fund that is selling tail risk?
   • What does high autocorrelation in monthly returns tell you?
   • What is the difference between Sharpe and Sortino?
8. 048What is event-driven investing?Event-driven and merger arbCorephone / first roundEvent-drivenMulti-manager platforms

   Say this

   Investing where the return depends on a specific corporate event happening rather than on the business getting better. Mergers, spin-offs, restructurings, index changes, rights issues, activist campaigns. Because the payoff is tied to an event with a date, the main risk is completion and timing rather than valuation.

   Then walk it

   1. The sub-strategies: merger arbitrage, which is the biggest; spin-offs and stub trades; distressed and bankruptcy; capital structure arbitrage; index and technical events; activist and special situations.
   2. What unites them is a defined catalyst with a legal or contractual structure. You are underwriting a process, so the work is documents, regulators and counterparties rather than modelling ten years of cash flow.
   3. The payoff shape is characteristic: a high probability of a small gain and a small probability of a large loss. That is short optionality, and it means the return series looks smooth until it does not.
   4. Which has an important consequence for measurement. Event-driven strategies show attractive Sharpe ratios in benign markets because they are structurally short a tail. Any evaluation has to price that explicitly.
   5. Skill sits in unusual places: reading merger agreements, judging antitrust outcomes, understanding creditor classes and voting mechanics, and knowing the arbitrage community's positioning.
   6. The environmental dependency is worth naming. Deal flow is the raw material, so event-driven returns depend on corporate activity and on the regulatory climate. A hostile antitrust regime widens spreads, which raises returns and raises break risk at the same time.

   Where candidates lose it

   Describing it as 'investing in companies with catalysts', which is just fundamental investing with better timing. The defining feature is that the payoff comes from a structured event with legal mechanics, and the defining risk is that the event does not complete. Say the short-optionality point and you sound like someone who has looked at the return distribution.

   Expect next

   • Which event-driven strategy has the most capacity?
   • Why do these strategies show high Sharpe ratios?
   • What happens to event-driven returns when antitrust enforcement tightens?
9. 049Explain merger arbitrage and how the spread works.Event-driven and merger arbCoretechnicalEvent-drivenMerger arbitrage

   Say this

   You buy the target after a deal is announced at a discount to the offer and collect the gap when it closes. The spread exists because the deal might not close and because your capital is tied up until it does. So the spread is the market's price for break risk plus a time value of money.

   Then walk it

   1. The set-up for a cash deal: offer is 50, stock trades at 47.50, so the gross spread is 2.50 or about 5.3 percent. If it closes in four months, that is roughly 16 percent annualised before financing.
   2. The spread decomposes into three things: probability of break times the downside if it breaks, the time to close, and the financing cost of holding the position. You can invert it to extract the market-implied probability.
   3. That inversion is the standard piece of analysis and it is worth doing out loud. If the undisturbed price was 38, downside on a break is 9.50 and upside is 2.50, so the implied break probability is roughly 2.50 divided by 12, about 21 percent. Now you can compare the market's view with your own.
   4. The spread narrows as the deal clears hurdles: shareholder vote, financing, each regulatory approval. The P&L is earned in steps at those milestones, not smoothly.
   5. A stock-for-stock deal is different mechanically. You go long the target and short the acquirer at the exchange ratio, so you are trading the ratio rather than an absolute price, and you must handle the borrow on the acquirer and any dividends.
   6. The honest description of the payoff: you are writing insurance on deal completion. Low volatility, positive carry, and occasionally you lose several years of spread in one morning when a deal breaks. Which is why sizing, not spread hunting, is the skill.

   Where candidates lose it

   Calling it risk-free arbitrage. It is a short volatility, short tail trade. The two things that make an answer credible are computing the market-implied break probability from the spread and the undisturbed price, and naming the asymmetry of the payoff. Also get the annualisation right; a 5 percent spread over four months is not a 5 percent return.

   Expect next

   • What is the implied probability of completion in that example?
   • How does a stock-for-stock deal change the trade?
   • What is the undisturbed price and why does it matter?
10. 061Explain two and twenty.Fund structure and economicsCorephone / first roundFund of funds

    Say this

    A 2 percent annual management fee on assets plus a 20 percent performance fee on profits. The management fee runs the business regardless of returns; the performance fee is the incentive, and it usually only applies above the high water mark and sometimes above a hurdle.

    Then walk it

    1. Work an example so the asymmetry is visible. On 1 billion of assets that earn 10 percent gross: the management fee is 20 million, the performance fee is 20 percent of the remaining 80, so 16 million. The investor keeps 64 million, or 6.4 percent net from a 10 percent gross return. Roughly a third of the gross return goes to fees.
    2. The management fee is on assets, so it scales with asset gathering rather than with performance. That is the structural conflict at the heart of the industry, and it is why capacity discipline is a genuine signal about a manager.
    3. The performance fee is an option, not a share. The manager participates in the upside and does not pay for the downside, which is why the high water mark exists as a partial fix.
    4. Two and twenty is no longer the standard. Large institutional mandates negotiate closer to 1 and a half and 15 to 20 with hurdles, while the very best capacity-constrained funds charge much more, occasionally 3 and 30 or higher.
    5. And the pass-through model at platforms is a different animal entirely: instead of a fixed management fee, the fund charges its actual operating costs to investors, which can land well above 2 percent, and then takes a performance fee on top.
    6. The honest limitation: the headline rate tells you very little. What matters is the expense load, whether there is a hurdle, whether the high water mark is real, how often fees crystallise, and whether the fee is charged on levered or unlevered assets.

    Where candidates lose it

    Reciting the percentages without doing the arithmetic. An interviewer wants to see that you understand how much of the gross return leaves the investor, and that the management fee creates an asset-gathering incentive. Also know that pass-through expenses have largely replaced the flat 2 at the big platforms.

    Expect next

    • What gross return do you need to deliver 8 percent net?
    • What is a high water mark?
    • Why would a fund charge 3 and 30?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.